CROSS-BORDER ENGAGEMENT: AN INTEGRATED ANALYTICAL FRAMEWORK l 71
Information, Networks, and Learning: Variation of Entry Costs across Firms Although the basic framework is intuitive, it also seems likely that the export or investment decision is driven not just by the variation in how efficiently production at home is organized but also by differences in how well foreign markets are understood. This variation in information about destination markets among firms is captured here through heterogeneity in sunk entry costs among firms. The sources of the variation may reflect the level of embeddedness of the firm in the destination market or sector globally, the existing networks in the destination market, and tacit knowledge of the market or the business operating environment. These issues highlight the importance of “social capital,” that is, the value of social networks and relationships in conducting business. Networks may provide access to information and influence and to finance and potential assistance in hard times, and may lower search and other transaction costs through greater inherent trust. With networks, it is not just “who you know” that matters but “who and what who you know knows.” The greater the networks of your connection, the greater the value of that relationship. Thus, although productivity is important, a less efficient firm with family connections in the destination market may export or invest, while a higher-productivity firm without such connections may not (see Boisso and Ferrantino 1997; Jackson 2011; Rauch and Trindade 2002). Modeling the variation in firm-level information on destination markets through fixed entry costs is validated by extensive work on exporting. The importance of fixed entry costs of exporting, although prone to overestimation, has been confirmed in various studies (Das, Roberts, and Tybout 2007; Dickstein and Morales 2018). It is wellaccepted that the studies reflect imperfect information. Authors have extended the standard framework to allow for product-specific fixed entry costs (for multiproduct firms) and market-specific fixed entry costs, which are, on average, higher for advanced markets. The impact of fixed entry costs on firm entry is confirmed by the fact that the increases in exports that follow lower sunk costs tend to be through new firm entry (the extensive margin) rather than through an increase in export value of existing exporters (the intensive margin). The identification of firm-market fixed entry costs is an important consideration for South Asian firms, where years of regional nonengagement have led to narrow and shallow business networks in some country pairs. However, given the prevalence of diverse communities and the migration that occurred particularly around the time of partition, it is highly likely that there are large differences among national firms in knowledge connectivity (and hence sunk entry costs) compared to communities and markets across national boundaries. The approach used here is consistent with the work of Wagner and Zahler (2015), which allows for random entry costs and shows that a less productive firm with a lucky draw of a low fixed entry cost could enter a new destination ahead of a more productive
